European shares made a positive start to the New Year as they extended a two-week rebound in thin trade on Monday, with automotive stocks and euro zone banks leading the charge.

At 1216 GMT the FTSEurofirst 300 index of European shares was up 0.6 percent at 1006.07, breaking above the full retracement level of the December7-Dec 19 fall.

Volumes on the index registered a slight pick-up from last week's lows but remained thin at 37 percent of the 90-day average as the British and United States markets were closed.

With many fund managers still on holiday, equity markets were driven by short-term trades into sectors enjoying technical rebounds, such as automotives <.SXAP>, euro zone banks <.SX7E> utilities <.SX4P> and insurers <.SXIP>.

People are looking for underperformers and rotating sectors every few days, a trader said.

They're scared and keep their finger ready: if the market inches up, they buy, if it moves down, they don't.

Auto stocks were the top performers as they gained 1.9 percent after breaking above their 200-day moving average at the open, with tire makers Continental and Nokian Renkaat rising 4.7 percent and 2.4 percent, respectively.

The insurance and utilities sectors also outperformed as they broke above the 50 percent retracement of the November sell-off.

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Asset returns in 2011: http://r.reuters.com/suz52s

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EURO ZONE

Euro zone banks rose 1.2 percent after closing above the 38.2 percent Fibonacci retracement level of the November move on Friday.

Natixis argued current valuations on euro zone banks provided a major buying opportunity, arguing the region's leaders would not allow any default by a large country and the European Central Bank is providing adequate liquidity support to lenders.

A default by a large euro zone country and/or its withdrawal from the euro is a virtually zero probability event, Natixis said in a note.

As this event would have catastrophic consequences (on the rest of Europe), there are grounds to think that it will not occur.

The comments came as Greece's central governor warned that exiting the euro would have disastrous consequence for his country and the Greek government reaffirmed its belief that a return to the drachma can be avoided if reforms are implemented.

Natixis also noted euro zone banks have started to reduce their exposure to troubled sovereign debt other than domestic paper, and are working to increase profitability to meet stricter capital requirements.

Around Europe, Germany's Xetra Dax <.GDAXI> and Italy's FTSE Mib outperformed, as they rose 1.9 percent and 1.5 percent respectively, helped by better-than-expected manufacturing data.

Italy's and Germany's PMIs for December were unexpectedly revised up on Friday, while the euro zone reading was kept unchanged at 46.9, pointing to a slowdown in the rate at which the area's manufacturing activity is shrinking.

(Editing by David Cowell)

Germany